7/06/2009 @ 4:41PM

Forbes Classic: Too Ambitious?

This article originally appeared in the Sept. 1, 1975, issue of Forbes magazine.

What real estate investment trusts, W.T. Grant and oil tankers are to U.S. commercial banks, Argentina, Uganda and some other shaky countries could become to Robert McNamara’s International Bank for Reconstruction & Development. In fact, the World Bank, as it is known, has more than its share of poor risks; 23 of its 93 borrowers appear on the United Nations’ list of poor countries whose solvency is threatened by oil prices of the Organization of Petroleum Exporting Countries.

But the World Bank, unlike many commercial banks, has no loans in default or not accruing interest. Nor is the World Bank cutting back. It is lending full speed ahead. In the fiscal year ended June 1975, its loan commitments ($4.3 billion) and its own borrowings ($3.5 billion) were both more than double the 1973 level and five times the 1968 pre-McNamara figures.

McNamara, perhaps because he got too much publicity in connection with Vietnam, avoids contact with the press. But his actions speak for him. He has thrown the bank into the gap created by the recession and the oil crisis to help the less-developed countries move ahead.

While lauding his motives, some U.S. Treasury officials worry lest McNamara may be biting off more than the World Bank can chew. When it goes to borrow on the international money market, the World Bank’s $12 billion in bonds enjoy a triple-A rating. What bothers the Treasury people is that McNamara may be jeopardizing this rating by stepping up his lending at a time when some of its borrowers are getting shakier.

The World Bank’s liquidity is not in question. Its $22 billion in assets make it the world’s 25th-largest bank–about the size of New York’s Bankers Trust. As against just $12 billion in loans outstanding, however, the World Bank has $5 billion in capital and reserves–seven times as much as Bankers Trust. An amount equivalent to the World Bank’s capital is held in a portfolio of government bonds and time deposits.

Due to the billions of dollars the bank lent out when interest rates were much lower, its overall return on its portfolio is only 6.5%–less than the 8.2% the bank now pays for borrowed money. Despite this, however, the bank makes a healthy profit–$275 million in fiscal 1975, up 27% for the year. None of it, of course, was paid out as dividends. I.P.M. Cargill, the former British civil servant who is the bank’s financial vice president, explains: “We have been able to charge comparatively low rates on loans, simply because we don’t pay dividends on our equity.”

The bank’s triple-A rests on more than just capital and earnings, however. The industrial countries have guaranteed up to $19 billion in World Bank bonds, each country’s guarantee being in proportion to its share of the bank’s capital. (The U.S.’ share is 23%, Britain’s 9.3%, Germany’s 5%, and so on.) With only $12 billion worth of bonds currently outstanding, the bank still has $7 billion worth of elbow room.

So, what’s the worry? Simply that, if rapid lending continues, existing loan guarantees will be exhausted in a few years’ time. If that happens, the bank’s major stockholders would be called upon to kick in additional capital and to guarantee additional loans.

“If bank lending continues its pace of expansion, the U.S. may have to contribute another $25 billion [in capital and guarantees] by the early 1980s,” says John Bushnell, acting assistant secretary for international affairs. Of that money, $2.5 billion would be paid in capital; the balance would be in the form of a legally binding commitment from Congress to guarantee loans.

But would Congress go along? That is a bridge no one can cross until the bank comes to it. One possible hurdle is that Congress is not consulted on bank-lending policies. As chairman of the bank, McNamara is responsible only to a 20-man board of executive directors, which is supposed to represent the 126 member nations. Many of the members often have interests and policies at variance with those of the U.S. And yet Congress, in theory at least, must pick up its 23% share of any resulting tab.

Since 1970, the bank has taken a new direction. It has branched out from the traditionally conservative projects in power generation and transportation. It has begun to lend money for social projects–health, population control, education and rural development. Even World Bank director of policy planning, Mahbub ul Haq, concedes: “We are doing things today that would give our founding fathers a fit.”

One such social project would move 1.5 million people from overcrowded Java in Indonesia to a relatively uninhabited part of Sumatra. It involves clearing the jungle and building roads, hospitals and housing. The cost: $750 million, half of which the bank is financing. Unlike many of the older projects, it would not be directly self-amortizing.

“This change in policy,” says Herman van der Tak, director of the bank’s projects advisory staff, “reflects disillusionment throughout the world with the old notion that the benefits of development will somehow trickle down to the poorer groups in society. Running through all our programs now is the aim to reach those groups directly.”

Van der Tak is echoing McNamara, who angered a good many Latin Americans in 1972 when he cited figures showing that the poorest classes were getting poorer, not richer, in many developing countries. He alleged that most of the fruits of development were going to the upper and middle classes.

Perhaps the World Bank should be concerned with social justice, with income distribution and with population control. Perhaps it ought not to stick to a narrow vision of the good it can do for the poorer nations of the world. But is this broader vision compatible with a triple-A credit rating? That is a different question.